Understanding the TPP: Investor-State Dispute Settlement

Last week, we discussed data exclusivity for biologics and why it nearly derailed the Trans-Pacific Partnership (TPP). This week, we get even more wonky to explain another controversial feature of the TPP: investor-state dispute settlement (or ISDS). And yes, this one is important for health, too.

ISDS is a system under which multinational corporations (or MNCs) are allowed to sue foreign governments directly if the MNCs believe that the governments have violated the MNCs’ property rights. ISDS is intended to protect the investments of MNCs (i.e., the “investors” in ISDS) against over-reaching governments (i.e., the “states”). This, in turn, is meant to increase the flow of investments across international borders.

ISDS is a creation of international investment treaties and trade agreements (it is currently in some 3,000 international treaties, including the TPP), but it is a departure from the system established by the World Trade Organization. Under the WTO rules, if an MNC has a dispute with a foreign government, it has to ask its home government to bring a formal government-to-government complaint before the WTO. Under ISDS, the home government is largely left out of the process. ISDS cases are brought before an international tribunal, and there is no appeals process.

The clearest cut (and probably least controversial) example of ISDS would be a case where a government nationalizes an industry and seizes a foreign company’s factory; the company could then sue the government for compensation. But most cases where ISDS has been used have not been nearly so clean.

The majority of ISDS cases have been brought against the governments of developing countries. Many of them have been challenges to regulations passed by the government to protect public health, the environment, and labor. This highlights the inherent tension behind ISDS: at what point does a sovereign government’s right to regulate in the public interest become subordinate to a foreign corporation’s financial interests?

Nowhere is this tension more visible than in the case of tobacco. Philip Morris has sued the governments of Uruguay, Australia, and, most recently, Great Britain over those countries’ adoption of “plain packaging” tobacco regulations. Plain packaging regulations require that cigarettes be sold in uniform, plain boxes with prominent health warnings, instead of colorful, shiny packages that have been proven to be especially appealing to teenagers. (Plain packaging is endorsed as an appropriate tobacco control measure in a binding international treaty, the Framework Convention on Tobacco Control.) The tobacco industry, unsurprisingly, doesn’t like it; Philip Morris is now arguing that plain packaging constitutes an appropriation of its intellectual property rights, and it’s challenging the measures under ISDS provisions in multiple treaties. (It’s even been alleged that Philip Morris moved its headquarters to Hong Kong so it could sue Australia under an old Hong Kong-Australia investment treaty.) Most scholars think the tobacco industry’s claims are without merit, but in the meantime, governments will have to spend millions of dollars defending against the suits. And public health advocates worry that the threat of Big Tobacco litigation may discourage other countries from adopting tobacco control regulations.

Governments’ sour experiences with ISDS and tobacco, together with mixed evidence that ISDS actually increases investment flows as intended, have bolstered arguments for its abolishment. Nevertheless, many people just want ISDS reformed, not eliminated.

The TPP may take one positive step in that direction. It was reported last week that the TPP negotiators have agreed to exclude tobacco products from the ISDS provisions, effectively blocking the tobacco industry from using the TPP’s ISDS system to challenge tobacco control regulations. This is a major victory for health, particularly in a trade agreement that has otherwise been roundly denounced by public health advocates. It may also herald a new twist in the future of ISDS, as governments recognize that some limits on ISDS are necessary in order to protect legitimate public interests.